Price Hikes Backfire... Consumers Close Their Wallets [Domestic Market Shock] ②

Major Food Companies See Profitability Plunge in Q1 This Year
Raw Material Cost Pressure Drives Successive Price Hikes
Declining Consumer Sentiment Leads to Fewer Purchases

The worst domestic economic downturn directly impacted food companies in the first quarter of this year. Although these companies managed to maintain their topline by raising product prices since last year, profitability deteriorated across the board as consumers reduced their shopping frequency. In the retail industry, the continuous increase in food prices has further dampened consumer sentiment, leading to a vicious cycle of reduced spending.

A consumer is shopping in front of the snack sales stand at a large supermarket in Seoul. Photo by Yonhap News

According to CJ CheilJedang, the nation’s leading food company, on May 16, its food business revenue for the first quarter was KRW 2.9246 trillion, up 3% from the previous year. However, operating profit plunged by 30% to KRW 128.6 billion. The earlier timing of the Lunar New Year holiday this year, which fell in January, led to decreased gift set sales, and the burden of raw material costs further eroded profitability. During the same period, Lotte Wellfood’s revenue increased 3% to KRW 975.1 billion, but operating profit fell sharply by 56.1% to KRW 16.4 billion. When considering only its domestic business, operating profit dropped by 62.9%. Lotte Chilsung Beverage also saw its first-quarter operating profit decrease by 31.9%, joining the trend of deteriorating results.

Ottogi’s operating profit for the first quarter of this year was KRW 57.5 billion, down 21.5% from the same period last year. Revenue increased by 4.2% to KRW 920.8 billion. As a result, the operating margin fell from 8.29% to 6.25%. Nongshim showed a similar trend. Revenue increased by 2.3% to KRW 893 billion, but operating profit declined by 8.7% to KRW 56.1 billion, reflecting a retreat in profitability. The operating margin also dropped from 7.03% to 6.27%.

Cost Pressure → Price Increases → Declining Purchases

The food industry cited rising international raw material prices and sluggish domestic demand as the main reasons for the significant deterioration in profitability in the first quarter of this year. According to the Food and Agriculture Organization (FAO) of the United Nations, the global food price index in March this year rose by 0.2% compared to the previous month. Major raw materials such as wheat, palm oil, sugar, and cacao all saw price increases. In particular, cacao prices surged more than sixfold over the past year. In the food industry, 60-70% of production costs are concentrated in raw materials, making it difficult to avoid cost pressure. On top of this, the won-dollar exchange rate remained above KRW 1,400, further driving up the cost of imported raw materials. Most key raw materials are traded in US dollars.

For this reason, major food companies have defended their performance by raising prices whenever raw material costs fluctuated due to supply chain crises during the COVID-19 pandemic. At the end of last year, major food companies also announced product price increases, citing higher prices for chocolate, palm oil, and other ingredients, which were sequentially reflected in consumer prices at large supermarkets and convenience stores. In December last year, Orion raised the prices of snacks such as Choco Songi (50g) and Tokping Almond Chocolate, while Haitai Confectionery increased the prices of 10 products, including Homerun Ball and Pocky, by an average of 8.6%.

However, the actual benefit was limited due to shrinking demand resulting from consumer resistance. Last month, consumer prices rose by 2.1%, and the processed food price index jumped by more than 4%. A food industry official said, "Household consumption capacity is fundamentally shrinking due to a combination of job insecurity, high inflation, and political uncertainty," adding, "Now, people are even cutting back on daily necessities."

In fact, according to the Ministry of Trade, Industry and Energy, the number of purchases at convenience stores, where price resistance is highest, has dropped significantly this year. In January, the number of convenience store purchases fell by 2% year-on-year, and in February, it dropped by 5.4% due to the leap year base effect. Although there was a slight rebound in March (-0.5%), the downward trend continues.

Convenience Store Industry’s First-Quarter Earnings Shock

As a result, even convenience stores, which thrived during the COVID-19 pandemic thanks to their accessibility, have seen their growth stall. In the first quarter, BGF Retail, which operates CU convenience stores, posted revenue of KRW 2.0165 trillion, up 3.2% from the same period last year, but operating profit fell by 30.7% to KRW 22.6 billion. GS Retail, which operates GS25, saw its first-quarter revenue rise by 2.2% to KRW 2.7613 trillion, but operating profit dropped by 22.3% to KRW 38.6 billion. Emart24’s first-quarter revenue fell by 8.9% year-on-year to KRW 465.8 billion, and it posted an operating loss of KRW 10.4 billion for the same period, continuing its deficit. An industry official explained, "Unstable domestic and international environments, severe cold, airplane accidents, and wildfires all acted as variables affecting consumer sentiment," adding, "Compared to last year, which was a leap year, there was also one fewer business day in the first quarter this year, which was reflected in the results."

Korea Seven, which operates 7-Eleven, posted an operating loss of KRW 25.2 billion in the fourth quarter of last year, and recorded another deficit of KRW 31.7 billion in the first quarter. According to the Ministry of Trade, Industry and Energy, domestic convenience store sales in the first quarter of this year decreased by 0.4% compared to the same period last year. This is the first time since statistics began in 2013 that quarterly sales at convenience stores have recorded negative growth. The number of purchases at domestic convenience stores in the first quarter also fell by 2% in January year-on-year, and by 5.4% and 0.5% in February and March, respectively. The average monthly purchase amount per person also declined, from KRW 7,530 in January to KRW 7,390 in February and KRW 7,125 in March. An industry official said, "Online platforms such as Coupang have expanded their business areas to include fresh foods and groceries, which were previously considered strengths of offline retailers, intensifying competition," adding, "As the consumption slump continues, except for large-scale discount events or ultra-low-priced products, both the frequency and amount of consumer purchases at offline stores have clearly decreased."